The Reserve Bank of India is using currency swaps to withdraw rupees from the system after excess liquidity surged to a record 11 trillion rupees, in an effort to mitigate inflation risks.
On September 9, 2026, at 4:30 PM, Bloomberg News reported that the Reserve Bank of India (RBI) used currency swaps to drain liquidity from the banking system after the excess cash in India's financial system surged to a record high of approximately 11 trillion rupees, or about $1.15 billion.
Sources familiar with the matter revealed that the RBI has conducted short-term sell-buy foreign exchange swap transactions in the market, some of which are maturing in October.
Under such transactions, the RBI sells dollars to banks in exchange for rupees and agrees to buy the dollars back later, resulting in a temporary withdrawal of rupee liquidity from the banking system.
This movement resulted in the 3-month onshore dollar-rupee forward yield rising by 17 basis points to 2.97%, while the 6-month yield increased by 11 basis points.
Excess liquidity in the Indian banking system surged to a record high of approximately 11 trillion rupees, or $1.15 billion, following a massive influx of funds from the RBI's recent fundraising plan.
This massive excess liquidity has lowered banks' funding costs and is posing a challenge to the RBI, as lower borrowing costs could stimulate demand for loans and increase inflationary pressure.
As a result, investors in the bond and money markets are watching closely to see what further measures the RBI will take to manage the excess cash in the system, after the central bank recently increased its use of temporary liquidity-draining measures.
The recent use of currency swaps reflects the RBI's efforts to manage liquidity and restore it to an appropriate level without relying solely on interest rate adjustments, amidst concerns that excessive liquidity could lead to overly accommodative monetary conditions and increase the risk of future inflation.
Reference: bloomberg.com
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